Will the ‘sick man of Europe’ drag the global economy down?

Europe's industrial powerhouse is sputtering.

Germany’s economy shows no signs of improvement as Europe’s manufacturing powerhouse continues to struggle with factory slowdowns and stubbornly high inflation.

After battling a winter recession, Germany’s economy stagnated in the second quarter, according to the country’s Federal Statistical Office. GDP growth was zero in Q2 and was down 0.2% year-over-year.

Germany’s GDP shrank 0.1% in the first quarter and 0.4% in Q4 of last year.

Back-to-back quarters of shrinking GDP means Germany is technically in a recession. Even though policymakers are apt to avoid using that term.

The outlook isn’t expected to improve anytime soon.

Unfortunately, Germany’s slowdown is far from an isolated incident. Like dominoes, it will have ramifications for the rest of the world.

What’s ailing Germany?

Germany has been dubbed the “sick man of Europe” because it is failing to make headway while other, traditionally weaker, economies are recovering.

Take Britain as an example—the country derailed by a grueling Brexit process grew 0.2% in Q2.

Spain—a country with double-digit unemployment—expanded 0.4% in the same period.

Germany is Europe’s largest manufacturer, but orders for industrial goods have been falling.

Germany’s second-largest non-EU trade partner, China, is also slowing. That means fewer shipments of BMWs and Audis to the Chinese mainland.

Weak demand from China, surging inflation, and rising Eurozone interest rates have all combined to make 2023 a difficult year for the Germans.

“Exports have created our wealth [...] But as the global economy weakens, Germany takes it harder than others,” Economy Minister Robert Habeck told the national weekly newspaper Die Zeit.

He wasn’t mincing words when he said exports created Germany’s wealth.

More than half of Germany’s GDP comes from shipping goods overseas, according to the World Bank.

That’s a blessing when the global economy is booming. But once global demand sputters, exports can become a curse.

“Made in Germany”

Germany is the world’s fourth-largest economy and one of the “temperature checks” on global growth.

If the “sick man of Europe” sneezes, the rest of the world—America included—may end up with a fever.

In the short term, economists expect the situation to get worse.

Pantheon Macroeconomics, a U.K.-based economic consultancy, expects Germany’s GDP to shrink another 0.2% in Q3. Overall, the country’s economy is expected to decline by 0.2% in 2023.

A dismal 2023 means Germany will be one of the worst-performing economies in the Eurozone. And certainly worse than the other “big four” economies of France, Italy, and Spain.

Although the U.S. continues to be one of Germany’s biggest export markets, rising costs are making it more difficult for Americans to afford premium German products.

According to KPMG, you can partly blame the Fed and ECB for that. Especially as they keep interest rates higher for longer.

Auto woes are turning into an auto-pocalypse as fewer people purchase expensive German cars. Americans already have $1.5 trillion in car loan debt—they really can't afford to finance a $60,000 BMW when wages are barely rising.

"Made in Germany" isn't losing its prestige. It's just become increasingly out of reach for the average consumer.